THE DIRECTOR OF INCOME TAX (INTERNATIONAL TAXATION) vs. NIKO RESOURCES LTD.

ORAL ORDER (PER : HONOURABLE MR.JUSTICE BHARGAV D. KARIA)

It is seen

that HUB International

Ltd.

Canada,

in pursuance of an agreement signed between appellant and HUB provided the technical services including rendering of service of technical or other personnel. Further, fees for technical services were paid directly by appellant to HUB International. For applicability of section 44D, it is necessary that fees for technical services should be received by the foreign company from an Indian concern in pursuance of an agreement entered into with the Indian concern. Ina the appellant’s case agreement is clearly signed between HUB and appellant which is not an Indian concern and fees are also directly paid by appellant to HUB. As appellant is not an Indian Company section 44 D will not be applicable. The Assessing Officer’s argument that the appellant has been authorized on behalf of joint venture to enter into an agreement with the HUB, and that the expenses are jointly shared by the appellant and GSPCL, and therefore section 44 D will be applicable, is not convincing and is over-stretched. Further, the ITAT Delhi Bench decision relied upon by the appellant is clearly applicable in this case, whereas the decision of advance ruling authority relied upon by the Assessing Officer is not applicable. Therefore, I am of the view that appellant’s case is covered under section 44 BB and not under section 44 D r.w.s. 9(i)(vii) and 115 A.

The Assessing

Officer is, therefore,

directed

to apply withholding tax @ 4.2.% and not 21% for the purpose of deducting tax at the source. ”

“7. On perusal of the provision of section 44 D, it is evident that it is a special provision for computing income by way of royalty in the case of a foreign company and it provides that the deduction admissible u/s. 28 to 44 D in computing the income by way of royalty or fees for technical services received from Govt. or an Indian Company in pursuance of income by way of royalty or fees for technical services received from Govt. or an Indian concern in pursuance of an agreement made by the foreign company with Govt. or with the Indian concern before 1st day of April, 1976, shall not exceed in the aggregate twenty per cent of the gross amount and in other cases, no deduction is to be allowed if the agreement is after 31.03.1976. Admittedly, the assessee has not received any income from the Govt. or from any Indian concern. In the present case, HUB International Ltd. is a Canadian concern and had an agreement with the assessee, a company in corporation in Canada. The fees for technical services are paid directly by the assessee to HUB International. Apparently, therefore, the provisions of section 44 D would not be applicable. The assessee’s case would be covered by the provisions of section 44 BB, which provides for special provision for computing profits and gains in connection with the business of exploration, etc. of mineral. As per this section, the non- resident company being a non-resident engaged in the business of providing services, or facilities in connection with, or supplying plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of, mineral oils. The assessee

has provided

drilling services to HUB International in the nature

of provision

for technical/supervisory

staff

for exploration and development of oil and gas in India. The observations of the Assessing Officer that the assessee has been authorized on behalf of joint venture into an agreement and that expenditure were jointly shared by the assessee and GSPL and, therefore, section 44 D is applicable, is not correct. In view of the decision of the Madras High Court in the case of CIT Vs Craigmore Land & Produce Co. order.”

in connection

with prospecting /extraction /production of mineral oil would be chargeable to tax under section 44D read with Explanation to section 9(i)(vii) of the Act or under section 44BB of the Act. The Supreme Court has held as under:

“11. It is also urged on behalf of the appellants

that the instruction/Circular dated 22.10.1990 Ernakulam and Others[1]. It has been further pointed on behalf of the appellants that even under the provisions of Section 3D of the Oil Fields (Regulation and Development) Act 1948 a mining lease means a lease granted for the purposes of searching for, winning, working, getting, making merchandisable, carrying away or disposing of mineral oils or for the purpose connected therewith and such a lease includes an exploring or prospecting lease. Reference has also been made to the Petroleum and Natural Gas Rules, 1959 framed under Section 5 of the aforesaid Act. Under Rule 4 of the said Rules no person can prospect for petroleum except pursuant to a Petroleum Exploration License (PEL) granted under the Rules and no person can mine petroleum except in pursuance of a Petroleum Mining License (PML) granted under the Rules. It is pointed out that under Rule 7 of the Rules of 1959 a petroleum mining license (PML) entitles the licensee to carry out construction and maintenance in and on such land, works, buildings, plants, waterways, roads, pipelines etc. as may be necessary for full enjoyment of the PML. On the said basis it is argued that rendering any service in connection with prospecting and extraction is an integral part of mining and that the expression “mining” in the Explanation 2 to Section 9(1) of the Income Tax Act, in the absence of any definition under the Income Tax Act, has to be understood as per the provisions of the Oil Fields (Regulation and Development) Act, 1948 read with the Petroleum and Natural Gas Rules, 1959. 12. Opposing

the contentions advanced on behalf of the appellants, Shri Gurukrishna Kumar, learned senior counsel for the Revenue has urged that the opinion of the Attorney General relied upon and the CBDT Circular has no relevance to the present case inasmuch as the agreements between ONGC and the non-resident companies made it abundantly clear that what is paid to the non-resident company are fees for technical services rendered. Though such services may have some connection with the prospecting, extraction or production of mineral oil, the primary service rendered by the non-resident companies on the basis of the agreements is not for prospecting, extraction or production of mineral oil but various ancillary services like training of personnel etc. which may have a somewhat remote connection with the business of prospecting, exploration or production of mineral oils. Learned counsel for the revenue has even suggested that if it is held that the High Court ought to have examined each agreement or contract to find out its real purpose and intent the revenue would have no objection if the matters are remanded for a complete exercise to be made on the above basis.

to understand

the exclusion of mineral oils from the definition of minerals in Section 3(a) of the 1957 Act. Regard must also be had to the fact that mineral oils is separately defined in Section 3(b) of the 1957 Act to include natural gas and petroleum in respect of which Parliament has exclusive jurisdiction under Entry 53 of List I of the 7th Schedule and had enacted an earlier legislation I.e. Oil Fields (Regulation and Development) Act, 1948. Reading Section 2(j) and 2(jj) of the Mines Act, 1952 which define mines and minerals and the provisions of the Oil Fields (Regulation and Development) Act, 1948 specifically relating

to prospecting

and exploration

of mineral

oils, exhaustively referred to earlier, it is abundantly clear that drilling operations for the purpose of production of petroleum would clearly amount to a mining activity or a mining operation. Viewed thus, it is the proximity

of the works contemplated under an agreement, executed with a non- resident assessee or a foreign company, with mining activity or mining operations that would be crucial for the determination of the question whether the payments made under such an agreement to the non-resident assessee or the foreign company is to be assessed under Section 44BB or Section 44D of the Act. The test of pith and substance of the agreement commends to us as reasonable for acceptance. Equally important is the fact that the CBDT had accepted the said test and had in fact issued a circular as far back as 22.10.1990 to the effect that mining operations and the expressions “mining projects” or “like projects” occurring in Explanation 2 to Section 9(1) of the Act would cover rendering of service like imparting of training and carrying out drilling operations for exploration of and extraction of oil and natural gas and hence payments made under such agreement to a non- resident/foreign company would be chargeable to tax under the provisions of Section 44BB and not Section 44D of the Act. We do not see how any other view can be taken if the works or services mentioned under a particular agreement is directly associated or inextricably connected with prospecting, extraction or production of mineral oil. Keeping in mind the above provision, we have looked into each of the contracts involved in the present group of cases and find that the brief description of the works covered under each of the said contracts as culled out by the appellants and placed before the Court is correct. ………..Details of contracts……. The above facts would indicate that the pith and substance of each of the contracts/agreements is inextricably connected with prospecting, extraction or production of mineral oil. The dominant purpose of each of such agreement

is for prospecting, extraction or production of mineral oils though there may be certain ancillary works contemplated there under. If that be so, we will have no hesitation in holding that the payments made by ONGC and received by the non-resident assessees or foreign companies under the said contracts is more appropriately assessable under the provisions of Section 44BB and not Section 44D of the Act. On the basis of the said conclusion reached by us, we allow the appeals under consideration by setting aside the orders of the High Court passed in each of the cases before it and restoring the view taken by the learned Appellate Commissioner as affirmed by the learned Tribunal.”

the appeal stands dismissed. No order as to costs. (J. B. PARDIWALA, J) (BHARGAV D. KARIA, J) PALAK